Chapter 5: THE ROLE OF GOVERNMENTS

CHAPTER 5

The Role of Governments

AN OPPRESSIVE GOVERNMENT IS MORE TO BE FEARED THAN A TIGER. — CONFUCIUS

MARKETEERS MUST UNDERSTAND that the world’s markets are overseen by governments, and even “free” markets are subject to considerable legislation. Ideally, those governments set policies based on what they believe will serve the greatest number of their people to the greatest extent. Trade and its regulation are a source of tax income for governments, which also recognize that physical security is tied very closely to economic security. Not only does a strong economy generate funds for military expenditures but it also, via international trade, creates a bond of codependency that strengthens every nation through alliance. It’s clear from history that trading partners often become military allies in times of trouble. It’s equally clear from history that economic benefits that can’t be won at the conference table are often decided on the battlefield. Marketeers must understand both the role of governments in trade and the motivation for that role.

Sovereignty, Prestige and Security: Our Market, Our Rules

The maintenance of national borders is the single-most-important element that separates international trade from domestic trade. Geography aside, no country applies the same level of restriction within its borders as it does when dealing with its neighbors. The ability to maintain, protect, and restrict entry across (or exit from) national borders isn’t merely symbolic; it’s a legal requirement of a nation’s sovereignty. Failure to do so leaves it open to claims that it’s not a country at all and is therefore subject to control by other parties.

Some countries have very tight control of their borders (Russia, China), making them military and commercial checkpoints. Others (Canada, the United States) take a far less stringent approach to the movement of people and products across their borders. The former examples believe themselves to be in great danger from foreign intervention, while the latter exhibit an almost recklessly open approach to foreigners. The difference in approach has a great deal to do with each country’s view of their international prestige. Countries at the top of the economic heap tend to flaunt openness as a challenge to would be opponents. Lesser economies seek to protect every possible area of vulnerability by keeping foreign traders at bay.

The formation of the European Union (EU) has essentially consolidated many smaller, weaker economies with a few strong nations to form a larger “country” with a new centralized government. This new entity has free-flowing internal state borders and a restricted periphery facing nonunion members. Beyond simply forming a trading bloc similar to NAFTA (Mexico, Canada, United States), the EU has formed an entirely new entity out of dozens of separate (and formerly

sovereign) economies that will eventually (they hope) have a single currency. Snidely nicknamed “The United States of Europe,” it was formed solely to advance its membership’s ability to compete in international trade, as the commercial wellbeing of almost 500 million people was at stake. Political sovereignty issues within the EU may be disputed for some time to come.

Populations always hold their governments responsible for the overall economic prosperity of a nation. So great is this responsibility that most revolutions have economic dissatisfaction at their base. Governments, in their turn, set customs duties and other cross-border trade restrictions based on their understanding of domestic and international markets, as well as on their ability to control currency flows. While there’s little disagreement as to the general movement toward “market economies” throughout the world, each country has its own take on the philosophy.

Each nation’s approach to their domestic and foreign markets is dictated by its requirement for border sovereignty, the belief in its own prestige, and a need to secure its physical and economic well-being. Marketeers must respect each government’s individual responsibility to its people, both from a legalistic (their country, their rules) and a commercial angle (their demand, my supply). NOTE: While no government is perfect, some do a better job than others of promoting international trade. Individual marketeers will waste a great deal of time and energy on a moral crusade, attempting to change a government’s view on a particular trade topic. Let the big corporations and trade organizations handle these problems. Your job is to find out where your product fits into the current scheme and to exploit that segment.

Host Government Trade Barriers: You Can’t Do That Here

The host government of your target market can throw up a vast number of roadblocks to your success—some of them quite arbitrary in appearance. Here are some government-formulated obstructions to look out for when researching a new foreign market.

TARIFFS Import tariffs are the means by which a government, in the form of a customs office, controls the in-flow of foreign goods across its borders. It’s a form of taxation and a source of revenue for the state. Rather than banning a certain product outright or letting it outcompete local producers, a nation makes its import prohibitively expensive, thus eliminating widespread acceptance. All nations have a sliding scale of tariffs for various categories of products and trading partners, with its “normal” rates often being referred to as Most-Favored-Nation (MFN) status. Imports from foreign countries held in disfavor pay in multiples of

MFN rates proportional to that disfavor. Many emerging markets have rather arbitrary tariff rates, which they blame on the fluid nature of their economic development. Tariffs are subject to much political influence and favoritism. This aspect must be calculated into the total pricing portion of a marketing plan.

INSPECTIONS No one disputes a government’s right and duty to protect its citizens’ health and welfare. This is certainly the case with foodstuffs, medical equipment, and farm animals. However, some inspections are performed with an eye toward delaying your product from reaching the marketplace. This can be a very important factor when it comes to perishable goods or those that are particularly time sensitive (e.g., publications). By slowing down the import process, governments protect their home producers without actually having a formal trade restriction. This tactic, like other nontariff barriers, is usually put into practice by economies seeking to diminish domestic consumption levels of foreign products until homegrown producers feel the playing field is level.

IMPORT LICENSING Like inspections, import licensing is a legitimate function of government, whereby the product must be formally licensed by the importer’s government and a fee paid by the importer. Where inspections control the product quality, licensing is used to control those involved on both sides of the transaction. It’s a process subject to arbitrary rulings, and licenses are withheld (or “reconsidered”) at the first sign of disgruntlement by local producers or bureaucrats. When used as a barrier, the granting of licenses is such an expensive and potentially corrupt practice that some goods in great demand end up being smuggled.

DISTRIBUTION Distribution will be considered at length in Chapter 10 but warrants some consideration here. In a larger sense, distribution is every aspect of the network that exists between the original seller and the end-user. Many marketeers have found that all of their plans came to naught simply because local governments placed inordinate restrictions on distribution or because local distributors are inefficient. Often, the distribution layers are so thick that consumers can’t afford the product once it has passed through the sundry middlemen and their add-on charges. Many international marketeers have found this to be a common problem in Asia, especially in highly developed Japan.

ENVIRONMENTAL CONTROLS Increasingly, governments are protecting the environment within their borders, and much of that control takes place at those borders. Restrictions on packaging (amount, size, recyclability), product content labeling (chemical proportions), and pollution controls can be placed on foreign exporters before licensing will be granted. While every country has environmental standards, strictness is in direct proportion to wealth. Advanced economies (like Great Britain and Germany) are famous for their concern about their domestic well-being, as much of their environments were polluted by their former industrial emphasis. Their environmental “impact studies” and “green” product packaging requirements can drive a product from market as easily as bad pricing. Research and preparation are the keys to avoiding this problem, which often occurs after a product is in the marketplace, when lawsuits are filed by environmental activists. Emerging economies, eager to attract investment, are far more lax, but “environmental colonialism” is fast becoming a rallying cry in the developing world.

TECHNOLOGY TRANSFERS A target company can insist that any joint venture, product importation or manufacture under license with a foreign marketeer must ultimately involve a transfer of technology (physical, process design, managerial, or otherwise). It’s a way to “catch up” with competitors without expensive research or investment.

Most developing markets insist on technology transfers if a product is to be sold within their national boundaries. There may be a “grace period” of several years while the transfer takes place. These same markets have the least stringent patent and copyright protection so theft or domestication is inevitable. NOTE: Coca Cola’s refusal to reveal its recipe to its local partner in India kept the beverage giant barred from that gigantic market for many years. As is true of business travel, if you can’t afford to lose it, don’t bring it with you.

CUSTOMS DELAYS Even once a product is licensed it can be held at customs without a stated cause for extended periods. Software, music and videos are usually a target of this practice, and you can rest assured that illegal copying is rampant. Customs may also hold perishables for the purpose of bribery or to protect local markets. The only way to combat this is to solicit the involvement of embassy personnel in advance of the importation.

LOCAL PARTNERSHIPS It’s not unusual for a government to require the use of a local partner to represent your product or to “invest” in your business. At times, the local is declared to be the majority partner, regardless of the size of their investment. By mandating that a local receive a piece of the action, the government maintains local control of the business and hopes to gain a management education for its population as a form of technology transfer. Part of a solid marketing plan in such an environment requires the studied selection of the right partner. Keep in mind that in some countries (Indonesia, China, Vietnam), the government will assign a partner for certain industries.

LOCAL CONTENT REQUIREMENTS If your plans include the construction or purchase of manufacturing plants overseas, you’ll find that most governments require that you use some local companies as parts suppliers. No matter how efficient it may be for your business, you will not be allowed to simply import all the parts from your headquarters. While this requirement can be planned for, little can be done if local suppliers raise prices.

This can occur when they’re ready to push you out of the market and take over your facility, so vigilance and good government connections are required.

CONTRACT LANGUAGE Contracts with foreign firms are typically binding in the dialect of the locality in which the contract will be executed. (Although you may have signed a translation as well, it’s meaningless and unenforceable.) Before you sign anything make sure your own translators have gone through the document thoroughly. From one end of the economic scale to the other, local courts favor local businesses.

QUARANTINE This process applies mostly to goods (such as live animals or foodstuffs) that are suspected of carrying disease or infestation. The goods are held at a controlled location until inspectors can determine whether they pose a health threat.

Although the word quarantine literally means “40 days,” there’s no set time limit for the holding process on an international level. Some countries may use the quarantine process to hold materials they believe have deleterious cultural ramifications. Books, movies, tapes, periodicals, and CDs are some notable targets, with religious fundamentalist and politically isolated nations being the most regular practitioners of such quarantines.

QUOTAS An import quota is a non-tariff barrier imposed by a government to restrict the quantity of imports it will take from certain national markets or exporters. It is also a means of keeping all of its trading partners happy. For instance,

Government A will allot 20 percent of its entire importation of a product to each of five trading partners. This process can also be used to protect local producers from foreign trading practices (lower the quota of the most competitive exporter) or as a punishment for political problems between rival powers (lower or eliminate an entire nation’s quota). Even the best marketeers can expect to suffer if their home government conflicts with the host officials. NOTE: Poor economies see absolutely no advantage in granting foreign companies the same trading rights they’re reserving for themselves. Marketeers from these foreign markets must realize that the quotas set by their home governments can be used as a countermeasure to pry open a target foreign market. Having good political connections at home is as important as having them abroad.

ANTI-DUMPING LAWS These laws were instituted to prevent foreigners from selling products at extremely low prices into a market to drive out competition. This is called

“dumping.” Local competitors are the first to cry “foul,” hoping to tie up a foreign firm in court, and the tactic usually works quite effectively. Only countries with sophisticated commercial law can use this type of legislation. The remainder resort to any and all of the tactics listed above to protect market share. WARNING: It’s surprisingly easy to prove “dumping,” due to the widespread access to trade information. Your overseas competitors are well aware of what it costs you to produce and distribute a product. Selling “under cost” is a dangerous tactic in an information society.

Home Government Intervention: You Can’t Do That There

It’s rare for a country to attempt to stop its local companies from exporting. Even when they permit a steady outflow, governments maintain oversight and taxing rights. Marketeers, however, may have just as difficult a time handling their own government as they will the overseas variety. As is true of import laws, not all export requirements are written down in all countries and are therefore

subject to “negotiation” and arbitrary enforcement. Research and good governmental relations are keys to keeping your product in the export pipeline.

EMBARGO While there’s much debate as to whether embargoes accomplish their political goals, there’s little doubt that they have a disastrous effect on exporters. Blockade running is rarely part of anyone’s marketing plan and long-term risk is high. Some (like the U.S. embargo of Cuba) are ignored after several years while others (the

U.N. embargo of Iraq) are more stringently, though not completely, enforced. NOTE: Marketeers must be aware of the political environment they work in and be prepared to calculate, as well as manage, risk.

NATIONAL SECURITY ISSUES Some goods are considered too strategic militarily and economically to be freely marketed to other nations, regardless of the profit potential. These may include nuclear materials, strategic minerals, chemicals, computer chips, technical manuals, or military surplus. Countries that have these restrictions delineate them quite clearly, and violation is a criminal offense.

EXPORT TARIFFS Governments tax exports primarily as a source of revenue and use the process as a means of promoting or punishing particular industries. These tariffs are, like import duties, a means of controlling flow and controlling businesses. Export duties can be highly negotiable in some countries and should be thoroughly investigated during the market planning stage. Many countries have set up export processing zones for foreign manufacturers, so that goods produced domestically for export will not be tariffed. These zones promote investment and job creation while protecting domestic manufacturers from direct competition.

EXPORT LICENSING Like export tariffs, licensing is a flow control. It’s often used as a means of denying a rival economy access to both raw and finished products without instituting a full embargo. Keep your eyes open and avoid political crossfire.

ANTI-REROUTING MEASURES When embargoes and quotas are in place, exporters often try to reroute their products through less controversial areas and have the “country of origin” changed in the paperwork. Getting caught practicing this tactic can get an exporter in serious trouble with his home government.

JOB PROTECTION SENTIMENTS Governments will often clamp down on their exporters when they detect that the products being exported will result in job losses for the domestic market.

Heavy machinery and high-tech manufacturing equipment can be targeted. If export tariffs on your products don’t exceed the gain from taxes derived from the potentially lost jobs, expect government intervention.

Formal and Informal Restrictions: Protecting Prosperity

Discussed above are the very formal and, for the most part, straightforward means by which governments control the marketing of their domestic producers, as well as that of foreign companies. Beyond these codified restrictions, there are a host of constraints—neither codified nor necessarily government enforced—that can affect the marketing of your product in foreign lands. These informal barriers (listed below) are more difficult to detect and, in many cases, harder to overcome than their more official counterparts.

PUBLIC RELATIONS The number of public relations fiascoes committed by international companies is large, legendary, and the subject of several books. From poorly translated brand names to the lack of locally hired management personnel, bad public relations (and even worse, press relations) can sidetrack the best of products. Often these public relations disasters are engineered (or at least exacerbated) by market competitors, who make appeals to some or all of the other issues listed in this section.

NATIONALISTIC Competitors, host government officials, and political activists are not beyond raising the cry that your marketing efforts are “bad for the nation,” that they threaten its continued survival or strength. This barrier was used to restrict

Australian wines in France, British movies in Argentina, and virtually any major

Japanese product in the United States during the 1980s. It’s a very powerful force and a difficult one to control.

RELIGIOUS Religion plays a greater factor in business every year, with much of it centering around Islamic beliefs regarding profit taking and interest rates. However, many

Christian fundamentalist groups have flexed their muscles as of late (e.g., the

Disney boycott), with marked results. Because religion carries such an emotional impact, pure reasoning and factual presentation will do little to get your product back on track.

ETHNIC As can readily be seen in Bosnia or Burundi, ethnic conflicts that are centuries old still burn hot. Belief that your product is ethnically dangerous or inferior can stymie your marketing efforts whether the accusations are true or not. Nestlé faced cries of racism over its sales of baby formula in Africa while many of the marketing problems faced by the makers of the Yugo were based on the fact that few people believed the Yugoslavians were capable of building a proper automobile.

Overcoming ethnic stereotypes takes years of work and enormous amounts of money.

SOCIETAL Some societies have a structure that simply will not accept certain products— at least right away. It may be a matter of taste (light beer in Germany) or social restriction (“adult” movies in Iran). Marketeers must often approach a market

several times before they’re permitted entry. Some industries are bound by edict not to promote foreign products. Canada’s radio broadcasters, for example, are required by law to limit the playing of foreign-produced music as a means to promote Canadian culture.

SCIENTIFIC Product lines that are radically innovative may have a difficult time overcoming the skepticism of the target market. Medicines, therapies, business software, securities, and the like suffer intense scrutiny (mostly justified) when entering foreign markets. It’s best to assemble your proof beforehand and tailor its delivery to the target market.

ETHICAL “End Apartheid” and “Remember Tiananmen Square” were both used as rallying cries to affect the marketing and profit generation of many products from

South Africa and China as well as from companies that traded with them.

Although both eventually resulted in some formal legislation, the ethical considerations started as grassroots, informal restrictions. WARNING: It’s a series of quick leaps from ethical concerns to political rancor to restrictive legislation. If a marketeer waits to take action at the end of the process, it may be too late.

ENVIRONMENTAL Water pollution, endangered species, and alleged man-made global warming are very emotional concerns of very vocal groups, who often look for international companies to pillory. They are well-organized and zealous. If your product has any potential ill effect on the environment, you can expect major market resistance, even without restrictive legislation, once such effects are brought to light. Environmental action groups enlist anyone they can in their effort and are unabashed when it comes to emotionalizing an issue. NOTE: Nine-year-olds wearing “Save the Dolphins” buttons did as much to reform tuna fisheries (and affect buying habits) as any law. Beware, and be aware of, selfrighteous consumers. They carry their wallets next to their hearts.

EDUCATIONAL Sometimes the greatest informal barrier is the educational level of large sectors of the target market’s population. Massive sections of the globe are still illiterate and many more are innumerate. It’s not unusual for a controlling government to wish the situation to remain in stasis. Even when educational levels aren’t this low, many products, from cars to computers, have their own particular “learning curve.” Training must be part of your marketing plan when educational levels are key to a product’s acceptance.

Trading Blocs: The Invisible Handcuff

In the last few decades, nations have bound themselves together in non-military regional alliances that are designed (at least ostensibly) to promote trade.

However, those that join such trading blocs have recognized the interdependence of trade among their immediate neighbors and use the blocs to prevent outside marketeers from having regional free-flow. Blocs essentially restrain foreign traders from assailing the weaker members by protecting them with numerical strength. Deal with one, deal with all. Unlike Adam Smith’s famous natural market forces, which act as the “invisible hand” to move all markets to eventual equilibrium, blocs work as regional handcuffs to control and sometimes eliminate trade in certain products. International marketeers need to be aware of the membership and goals of such trading blocs, so that their plans can be tailored not just to a single country but perhaps to an entire region. Listed below are some of the major trade organizations. 1.APEC (Asia-Pacific Economic Cooperation) 2.ASEAN (Association of Southeast Asian Nations) 3.NAFTA (North American Free Trade Agreement) 4.MERCOSUR (Argentina, Brazil, Paraguay, Uruguay, Chile, Bolivia) 5.FTAA (Free Trade Area of the Americas) 6.OPEC (Organization of Petroleum Exporting Countries) 7.EU (European Union) 8.SAARC (South Asian Association for Regional Cooperation) 9.SAPTA (South Asian Pacific Trade Association) 10.CIS (Congress of Independent States) 11.AFTA (ASEAN Free Trade Association)

The WTO and International Intervention: One World, One Court

One of the most influential international governmental bodies to affect marketing has been the World Trade Organization. As an outgrowth of the General Agreement on Tariffs and Trade (GATT), the WTO and its enforcement arm, the World Court, have been set up as an oversight body to rule on international trade disputes. Countries and companies accused of unfair trading practices can be brought before the court for trial and potential punishment (usually fines).

Membership in the WTO isn’t open to every nation, as there are certain guidelines that must be met prior to acceptance. The greatest benefit is the low (if any) tariffs on trade among association members. The goal of the organization is the eventual removal of all import/export tariffs. The membership and their companies must also conform to Generally Accepted Accounting Principles (GAAP) as laid out by the WTO, so that each nation’s “books” may be accurately

compared with those of other members. Many countries have been denied membership over this issue, as it greatly affects the valuation of national assets.

The effect on marketeers is that they can no longer just be concerned with local court rulings in the targeted markets (though such courts usually have little enforcement capability over foreign nationals). The stakes are much higher nowadays and the WTO has a very wide reach. Market or membership banning is a possibility for egregious violators, and business deals can easily become international political problems (as happened with France’s Total oil venture in Iran). Commerce usually comes out on the short end when politicians become involved; marketeers are forewarned to steer clear of WTO violations. The organization is still nascent, so it’s best to keep current with their rulings and legislation.

Overseas Risk Management: Read The Map . . . and Heed It

Marketing abroad can be a very risky pursuit as the legal landscape in some countries is extremely fluid. Laws are sometimes uncodified and even when they are, interpretation can be arbitrary. Governments certainly have the right, and in many cases the duty, to intervene in businesses or trade being conducted by foreign nationals. However, there are some other governmental activities that go beyond the law (or at least blur it) for which the international marketeer must be prepared.

DOMESTICATION Entering a new market with a new product can often perplex local authorities who, not seeing the potential, may initially grant a marketeer carte blanche to operate. Success does attract attention, so it’s not unusual, especially in the emerging markets, for successful foreign companies to suddenly discover that they have a new partner. The partner may know absolutely nothing about your business and may bring nothing in the way of investment. Regardless, the government may insist that as much as 51 percent of the company be put under the control of the new associate or that the associate at least be given veto power over company decisions. It can be the result of government greed, pressure by competitors who feel you were given a “sweetheart” deal, or sudden xenophobia with accompanying fears of exploitation. Multimillion dollar projects can be forced into renegotiation well after a project has been active, as happened to the Enron hydroelectric project in

India; antiforeigner sentiments forced the American company to shut down construction while the deal was restructured to favor local partners. Local governments usually wait until a company is too committed to walk away before using the domestication ploy.

TAXATION Governments of all sizes and economic standings view business as a source of tax revenue. Unlike the tactic of domestication, taxation allows the government to receive a portion of a foreign company’s operation directly, without the sham of a proxy. Some authorities lure foreign businesses with initially low tax rates or

“grace periods,” with the full intention that once the company has been committed and is operating successfully, tax rates will soar almost to the point of being confiscatory.

EXPROPRIATION During periods of extreme political stress or due to inordinate levels of greed, governments will take over a foreign company outright. The former motivation still occurs quite regularly in war-torn countries (such as those in eastern Europe or central Africa). The potential is always there for any company operating in foreign territory, war-torn or not, when internal or international political tempers rise. The latter cause for expropriation has rarely been seen since the early 1980s and has been usurped by the somewhat more subtle domestication.

SPONSORED COMPETITION Like domestication, sponsored competition puts a favored local company or person under a government aegis. These “competitors” are given substantial financial and distribution aid in the hope that they’ll unseat the foreign firm that first brought the product to market. Often, these sponsorships are further aided by technology transfers that were mandated by the government as part of allowing the foreign company to operate within its borders. Transfers are handed over directly to local companies that will exploit them without paying fees or royalties. In a variation on this tactic, local partners have also been known to siphon off funds and materials from a joint venture with a foreign firm, in order to set up a competing company. Local government officials then turn a deaf ear to the complaints or lawsuits brought by the foreigners.

BRIBERY Government officials seeking bribes from foreign firms is a worldwide problem.

It can take the form of a storefront shakedown by the local police, special

“processing fees” by customs officials, or “requests” for campaign donations for incumbent politicians. Bribery in some economies becomes the grease that makes the wheels of commerce turn more easily. Anyone engaged in international marketing must be prepared to deal with both the seemly and unseemly versions of such requests.

RISK MANAGEMENT In all of the cases stated above, marketeers have to learn how to manage risk.

The first step is recognizing potential risk through proper pre-entry research (Chapter 8). Once the level of risk has been determined in a particular market (it exists to some degree in all markets), the best possible preventative is engendering and maintaining good “relations” with the pertinent government officials.

Marketeers should realize that realpolitik can become machtpolitik very quickly if a foreign company falls into disfavor with a host government. Risk management is an ongoing process and requires eternal vigilance.